Regulatory Framework

1.1 Are there any national laws that specifically regulate outsourcing transactions?

No national laws exist in Spain which specifically regulate outsourcing transactions. Consequently, general Spanish laws regulating civil and commercial contracts (including the Spanish Civil Code and the Spanish Commercial Code) set out the rules that apply to outsourcing transactions.

Generally, outsourcing transactions have a complex nature and may involve the provision of services, the performance of works, manufacturing activities and/or the supply of goods, among other activities. Each of these activities has a different treatment under Spanish law which means that, depending on the specific scope of the relevant outsourcing transaction, all or part of these rules shall apply.

Finally, certain aspects of the outsourcing transactions, such as labour aspects, tax matters or the processing of personal data, are subject to the corresponding Spanish general laws regulating such matters and, as a general rule, no specific rules exist for outsourcing activities.

1.2 Are there any additional legal or regulatory requirements for certain types of outsourcing transactions, for example: a) public sector transactions; b) business process transactions; c) financial services transactions; d) IT transactions; and e) telecommunications transactions?

a) Public sector transactions

Public sector contracts, including outsourcing contracts for public bodies, are subject to specific rules set out, mainly, by the Law on Public Sector Contracts (Spanish Royal Legislative Decree 3/2011). This law is aimed at ensuring the transparency of and the freedom of access by providers to procurement processes of the public sector. In addition, it sets out certain rules regarding the minimum content of such agreements and grants public entities and bodies subject to this law with certain rights (e.g., certain IP rights over developments performed by the provider under a services/outsourcing contract).

b) Business process transactions

No specific laws exist in Spain which specifically regulate business process transactions.

c) Financial services transactions

Under Spanish law, certain requirements are imposed on financial entities in the event that they decide to outsource activities. This is the case for, for instance, credit entities (e.g., Spanish Royal Decree 84/2015 and Circular 2/2016 of Bank of Spain) and payment services entities (e.g., Spanish Royal Decree 712/2010).

According to these rules, such financial entities are entitled to delegate the provision of services or the exercise of their functions to a third party, provided that the activity of the financial entity does not end up empty of any content and that the outsourcing does not limit the financial entity’s internal auditing powers or restrict the supervision powers of the Bank of Spain or the European Central Bank. Also, core activities that are legally reserved to financial entities cannot be outsourced.

Also, the outsourcing of activities or functions that are considered “essential” to credit entities is subject to additional requirements, including the need to formalise the outsourcing transaction in writing, clearly setting out the rights and duties of the parties or the need to communicate such delegation in advance to the Bank of Spain.

d) IT transactions

No specific rules are set out in Spain to regulate IT outsourcing transactions. However, since many of these transactions result nowadays in the implementation of cloud computing technologies, a specific reference to this matter needs to be made.

The Spanish Data Protection Agency, as the public authority in charge of monitoring compliance with data protection law in Spain, has issued two guidelines regarding cloud computing. Generally, cloud computing technologies contain and process huge amounts of personal data. For this reason, the Spanish Data Protection Agency has set out certain minimum requirements that Spanish companies have to comply with when hiring cloud computing. Among these requirements, clients need to be aware of the location of the data processed by the provider and its authorised subcontractors in order to be able to comply with existing data protection restrictions to the transfer of personal data outside the European Economic Area.

Also, in the event of the outsourcing of “essential” functions by credit entities that involve the use of new technologies, such entities are required to perform a previous risk assessment before notifying the Bank of Spain of the outsourcing transaction. In particular, and according to a communication sent by the Bank of Spain to credit entities in 2012, any credit entity that plans to engage cloud computing services of any relevant systems needs to carry out a prior risk assessment and has to notify the Bank of Spain of the project in advance.

e) Telecommunications transactions

No laws exist in Spain which specifically regulate telecommunications outsourcing transactions. However, the provision of electronic communication services and the operation of telecommunication networks are subject to certain regulatory requirements − mainly arising from Spanish General Telecommunications Law (Law 9/2014) and its ancillary regulations − that will need to be complied with by the parties to the outsourcing transaction, such as registration of electronic communication services operators with the Spanish National Commission of Markets and Competition.

1.3 Are there any further legal or regulatory requirements for outsourcing transactions in any particular industry sector?

No, there are no other relevant legal or regulatory requirements.

1.4 Is there a requirement for an outsourcing transaction to be governed by local law? If it is not to be local law, is there any generally accepted norm relating to the choice of governing law?

No. According to EU Regulation 593/2008 (Rome I), contracts, including outsourcing contracts, shall be governed by the law chosen by the parties.

Regardless of the flexibility for the choice of law granted in Spain, there are certain aspects of Spanish law that are overriding mandatory provisions (and, thus, which applicability cannot then be excluded by the agreement of the parties), such as the applicability of Spanish data protection law to Spanish data controllers and their processors (please refer to question 8.1 below).

Legal Structure

2.1 What are the most common types of legal structure used for an outsourcing transaction?

Outsourcing transactions are generally complex transactions involving activities of a different nature, such as the provision of services, BPOs or the supply of goods. For this reason, several different structures are used in Spain for the implementation of outsourcing transactions depending on the nature of the transaction at hand. In general terms, Spanish law provides the parties with a lot of flexibility to create different legal structures.

Transfer of employees, assets or contracts. A main difference arises in cases in which the outsourcing transaction requires (or not) the prior transfer of the customer’s employees, assets and/or contracts by the provider. In the event of a transaction in which no transfer of employees, assets or contracts exists, a mere outsourcing agreement between customer and provider may suffice.

Conversely, in the event of a transfer outsourcing, the transfer of such employees, assets and/or contracts may require the performance of certain preliminary actions by the parties, such as prior notification of the transfer to the employees (if a transfer of undertakings exists) or obtaining the prior consent to the transfer of the counterparties to the transferred agreements. Also, if personal data files are assigned to the provider on a controller-to-controller basis as part of the transferred assets, information (and in certain cases, also consent) duties will need to be complied with vis-à-vis the affected data subjects.

Outsourcing agreements involving joint ventures or other M&A transactions. It is not uncommon in Spain that an outsourcing transaction is implemented through the creation of a joint venture by the customer and provider, by which the parties share ownership of an entity and through which outsourcing services are provided to the customer. This type of outsourcing transaction generally requires a more complex contractual structure since, in addition to the outsourcing agreement, other contractual documentation needs to be put in place, such as:

(i) the corporate documentation for the incorporation of the relevant newco (or, alternatively, the share purchase agreement to enter into the share capital of an existing entity that shall provide the outsourcing services); and

(ii) the shareholders’ agreement in which the parties agree to a set of rules to run the entity.

Procurement Process

3.1 What is the most common type of procurement process that is used to select a supplier?

In Spain, outsourcing transactions can be negotiated individually by the customer and the potential supplier, or can be negotiated by means of a tender open to more than one potential supplier. However, RFPs (Requests for Proposals) are the most common type of procurement process used in Spain by companies to initiate and address outsourcing transactions. Generally, RFPs are open to a limited number of suppliers that have been pre-selected according to their professional capabilities and experience in the outsourcing functions at hand.

When the scope of the services and tasks to be outsourced are really innovative and/or complex, other types of procurement processes, such as RFIs (Requests for Information), are also common in Spain.

In the last few years, many Spanish relevant groups of companies have developed or hired electronic/online procurement platforms. On these platforms, offers need to be posted by bidders. General terms and conditions applicable to the RFPs are generally posted by the customer and bidders are required to accept such general terms and conditions upon posting of their offers.

Finally, public bodies and entities are subject to the procurement rules set out in the Law on Public Sector Contracts detailed in question 1.2 above.

Term of an Outsourcing Agreement

4.1 Does national or local law impose any maximum or minimum term for an outsourcing contract?

No general laws exist in Spain that impose a maximum or minimum term for outsourcing transactions. The parties to the outsourcing transaction are free to agree the term they wish prevails.

As an exception to the foregoing, financial rules regulating outsourcing transactions in the financial sector set out certain rules which impact the contract duration. In particular, Circular 2/2016 of the Bank of Spain requires that financial entities entering into an outsourcing transaction involving “essential” activities reserve a contractual right to finalise the agreement at any time and for no reason (termination at nutum) upon paying a reasonable compensation to the supplier.

Also, in the event that the parties agree to an indefinite term (or a term that due to its length operates as an indefinite agreement), Spanish law grants the parties the right to terminate the agreement at no cost by providing reasonable prior notice. Generally, a six-month prior notice is considered reasonable (by operation of the Spanish Unfair Competition Law), although the assessment should be made on a case-by-case basis taking into account the specific circumstances of the outsourcing transactions.

4.2 Does national or local law regulate the length of the notice period that is required to terminate an outsourcing contract?

As a general rule, the parties are free to agree on the prior notice period. If the parties have agreed that prior termination can be carried out, but an agreed period is absent from the outsourcing agreement, such termination notice may not be unfair to a party. As set out in question 4.1 above, Spanish Unfair Competition Law (article 16.3.a) does not allow termination periods that result in unfair treatment to a party and considers, as a general standard, that a six-month prior notice is reasonable.

Charging

5.1 What are the most common charging methods used in outsourcing transactions?

Mixed structures including a fixed price and a variable price are common in outsourcing transactions. On BPOs, both the FTE-based model, in which the customer pays the supplier on the basis of the Full Time Equivalent (FTE) employees involved in managing and operating the process, and the transaction-based pricing model for outsourcing (TMO) are common charging methods.

5.2 What other key terms are used in relation to costs in outsourcing transactions?

Pricing benchmarking is a common contractual tool to maintain price competitiveness in medium- and long-term contractual relationships, such as outsourcing transactions. Penalties and bonuses based on performance and service level agreements (SLAs) are also common terms in outsourcing transactions impacting pricing.

Transfer of Assets

6.1 What formalities are required to transfer, lease or license assets on an outsourcing transaction?

As a general rule, the transfer, lease or license of assets is not subject under Spanish law to any formality and can be carried out by means of a private contract in any form (even oral form) by the parties.

However, as a general rule and especially for certain types of assets, it is advisable to formalise in writing the specific scope and terms of the transfer/lease/license. This is the case, for instance, for software licences since, in the event that no express agreement is made by the parties on the term and scope of the licence granted, certain legal assumptions shall apply by defect (five-year term, national scope, etc.).

6.2 What are the formalities for the transfer of land?

Although not strictly legally required, the transfer of land in Spain is always formalised in the form of a public deed granted before a Public Notary. Such public deed is the documentary instrument subsequently used for such transfer to be registered with the Spanish Land Registry. The constitution, amendment or finalisation of a mortgage needs to be formalised in any case by means of a public deed.

6.3 What post-completion matters must be attended to?

Registration of the transfer, lease or license of certain assets needs to be carried out. This affects, mainly, real estate, vehicles and IP rights (such as trademarks or patents). Registration of software is possible in Spain although not strictly necessary or common. Regarding software, other measures are common, such as the deposit of the source code of the software with a Public Notary.

Employment Law

Under Spanish employment law (article 44 of the Statute of Workers, which was enacted by Royal Legislative Decree 2/2015 of 23 October), a transfer of undertakings takes place if a group of organised assets that qualify as an autonomous production unit, capable of carrying out services and activities, is transferred.

7.2 On what terms would a transfer by operation of law take place?

The transferee of an undertaking assumes all the labour rights and obligations that the employees had with the former employer (the transferor), including those regarding social security and private pension plans. Therefore, the transfer itself does not entitle the employees or the transferee to terminate any of the existing employment contracts.

In addition, employees do not have a right to remain employed by the former employer; therefore, once the transfer of undertakings takes effect, the employees become employees of the transferee.

As regards collective bargaining agreements, unless otherwise agreed, the agreement that applies to the transferor at the time of the transfer of undertakings will continue to apply until it expires or a new one is agreed.

When an undertaking is transferred, both the transferor and the transferee are jointly and severally liable for the following:

all labour obligations in place prior to the transfer date; the period of this liability is three years starting from the date on which an obligation is not satisfied;

payment of all social security obligations prior to the transfer date; the statute of limitations for this liability is four years from the date on which the contributions were due; and

all labour obligations that were in place after the transfer date, in the event that the transfer constitutes a criminal offence.

7.3 What employee information should the parties provide to each other?

Although there is no particular regulation regarding this matter, prior to a transfer, both the transferor and the transferee must provide information to the employee representatives on the following issues: (i) the anticipated transfer date; (ii) reasons for the transfer; (iii) legal, economic, and social consequences for the employees arising from the transfer; and (iv) measures to be taken with regard to the employees (if the company does not have any employee representatives, all employees affected by the transfer must receive this information individually). The parties should provide each other with sufficient information to enable the transferee to ascertain whether any measure regarding the employees is required.

7.4 Is a customer/supplier allowed to dismiss an employee for a reason connected to the outsourcing?

A basic principle of Spanish labour law is that an employee may not be dismissed unless a legally recognised reason is provided. Therefore, in Spain, a “dismissal without cause” is not legally recognised. An employer may terminate an employment contract for objective or disciplinary reasons. In the case at hand, the grounds mentioned may be considered objective reasons.

According to Spanish case law, a company can dismiss its employees who render the specific services that are going to be outsourced based on objective reasons, including economic, technical, organisation or production grounds.

An objective dismissal is initiated by an employer by giving 15 calendar days’ written notice to the employee, together with the payment of all pending salaries and amounts. The notice must include an explanation of the circumstances causing the dismissal and the simultaneous offer of the statutory severance payment, which is 20 days’ salary per year of service, with a maximum limit of 12 months’ salary.

If the dismissal affects: (i) 10 or more employees in companies with fewer than 100 employees; (ii) 10 per cent of the employees in companies with between 100 and 299 employees; or (iii) 30 employees in companies with 300 or more employees, a collective redundancy must be carried out, which involves the need to provide the employees with thorough documentation and consult the representatives of the employees.

Objective and collective dismissals can be challenged in court.

7.5 Is a supplier allowed to harmonise the employment terms of a transferring employee with those of its existing workforce?

The main consequence arising from a transfer of undertakings is that, by operation of law, the transferee of the undertaking automatically assumes all the labour rights and obligations of the transferor with respect to the employees of the transferor affected by the transfer. This implies the transfer of the employment contracts and the maintenance of all the employees’ rights (e.g., length of service, salary, position, pension, benefits, etc.).

If the transferee wishes to harmonise employment conditions, it must initiate a consultation period with the employee representatives, and the harmonisation process must be justified on objective grounds (financial, technical, organisational or production reasons linked to the competitiveness or the technical organisation of the work). The consultation period is for the proposed measures and the consequences for the employees, it must take place “in good time” before the measures are taken and the consultation period may not be less than 15 days. During the consultation process, the parties are obliged to negotiate in good faith with a view to reaching an agreement.

7.6 Are there any pensions considerations?

The transferee of an undertaking assumes all labour rights and obligations that the employees had with the former employer (the transferor), including those regarding social security and private pension plans. This implies that the transferee must set up a new pension plan or an insurance policy with equivalent terms to those established by the transferor.

Data Protection Issues

8.1 What are the most material legal or regulatory requirements and issues concerning data security and data protection that may arise on an outsourcing transaction?

Spanish Data Protection Law (Spanish Organic Law 15/1999) shall apply, as a general rule, to any outsourcing transaction in which personal data of a Spanish data controller (i.e., the customer) is processed by a data processor (i.e., the outsourcing supplier) even if the data processor is a non-Spanish entity. This is due to the fact that Spanish customers, as data controllers, are compelled to comply with Spanish Data Protection Law when processing personal data both directly or through any third-party provider. For this reason, the outsourcing supplier will need to comply with Spanish Data Protection Law when collecting or otherwise processing personal data on behalf of the customer.

Main duties arising for the parties to an outsourcing transaction according to the Spanish Data Protection Law are the following:

the customer and supplier need to enter into a data processing agreement, which needs to comply with certain mandatory content;

both customer and supplier will need to comply, at least, with the mandatory security measures set out in Spanish Royal Decree 1720/2007. These mandatory security measures are divided into three levels (basic, medium and high), which will apply depending on the nature of the personal data and the purposes of the processing;

any international transfers of personal data outside the European Economic Area by the customer, the supplier or any of its subcontractors will need to be previously analysed to ensure that it complies with applicable rules. As a general rule, within the context of outsourcing transactions, such international transfers of personal data are subject to the authorisation of the Spanish Data Protection Authority. This is a key issue in the event of offshore outsourcing transactions; and

(d) any subcontracting by the supplier of tasks that involve the processing of personal data of the customer needs to be notified and authorised by the customer.

Failure to comply with data protection requirements may result in the imposition of administrative fines to the parties of up to 600,000 EUR.

The above legal framework shall be substituted by the General Data Protection Regulation (EU Regulation 2016/679) by May 2018.

Tax Issues

9.1 What are the tax issues on transferring the outsourced business – either on entering into or terminating the contract?

The supply of services or the transfer of goods undertaken by a VAT taxpayer with respect to the outsourced business will be subject to VAT, generally at a rate of 21%. In certain cases, a reduced tax rate or an exemption from VAT may apply. For example, indemnities related to the termination of the contract may, in certain cases, be exempt from VAT.

If the transfer qualifies as the transfer of an autonomous economic unit, the transfer is not subject to VAT, in which case Transfer Tax may apply if the transfer includes real estate assets.

Finally, in certain cases, Stamp Duty may be levied on notarised documents which may be registered in certain public registries.

9.2 Is there any VAT leakage on the supply of services under the outsourcing contract?

In general terms there should not be any VAT leakage, unless the trade or business activity carried out by the principal related to the outsourcing is exempt from VAT, in which case VAT charged by the provider on the outsourced services to the principal will not be tax deductible for the principal.

9.3 What other tax issues may arise?

If related parties (companies that belong to the same group) enter into an outsourcing agreement, transfer pricing rules will be applicable, both for Corporate Income Tax and for VAT purposes.

Service Levels

10.1 What is the usual approach with regard to service levels and service credits?

Generally, outsourcing transactions in Spain regulate the existence of key performance indicators (KPIs) and service level agreements (SLAs) in order to measure the correct development by the supplier of the outsourcing tasks. A breach of the SLAs shall normally result in a penalty and certain levels of over-performance of SLAs may also give rise to bonuses. It is also common that in certain circumstances, such as during testing programmes, during initial implementation or deployment of a task or following relevant changes to a task, such SLAs do not temporarily apply.

Customer Remedies

11.1 What remedies are available to the customer under general law if the supplier breaches the contract?

The Spanish Civil and Commercial Codes provide for general remedies such as the right to request correct performance from the breaching party and the right of the non-breaching party to claim damages in the event of a breach of the contract.

11.2 What additional protections could be included in the contract documentation to protect the customer?

Certain mechanisms, such as step-in mechanisms or temporary volume withdrawal mechanisms, have proven to be useful in certain circumstances to reduce risks and/or to improve the supplier’s performance.

11.3 What are the typical warranties and/or indemnities that are included in an outsourcing contract?

Warranties regarding professional capability, sufficiency and experience of the supplier’s team, ownership of the materials used for the performance of outsourcing tasks, compatibility of the systems of the parties, confidentiality, IT security, data protection compliance and licences and authorisations to perform the tasks are among the most common warranties included in outsourcing agreements. Also, the preparation (and periodic update) of contingency plans and transition plans in the event of termination is essential in outsourcing deals.

Insurance

12.1 What types of insurance should be considered in order to cover the risks involved in an outsourcing transaction?

It is standard market practice that the outsourcing agreement demands the existence of a civil and criminal liability policy covering the supplier’s professional activity with at least a certain coverage, as agreed.

Termination

13.1 How can a party to an outsourcing agreement terminate the agreement without giving rise to a claim for damages from the terminated party?

Under Spanish law, parties to outsourcing agreements are free to agree a set of rules regulating termination causes and effects. On this matter, a great level of freedom exists for the parties to agree which cases may give rise or not to penalties or damages. For instance, parties may agree that early termination by submitting prior notice to the other within a certain period of time in advance can result in total or partial termination without any right of the other party to claim damages for such termination.

13.2 Can the parties exclude or agree additional termination rights?

Yes. Parties are free to exclude or agree additional termination rights. As an exception to the foregoing, a provision excluding the right of a party to terminate in the event of a relevant breach of the agreement by wishful misconduct of the breaching party may be contrary to Spanish law.

13.3 Are there any mandatory local laws that might override the termination rights that one might expect to see in an outsourcing contract?

Intellectual Property

14.1 How are the intellectual property rights of each party protected in an outsourcing transaction?

Outsourcing agreements should provide for specific provisions regulating the use and assignment of the customer’s and supplier’s IP rights. Generally, a different regulation is set out for the following categories of materials:

(i) Pre-existing materials of a party. In this case, the most common rule is that the owner of the pre-existing material (either the customer or the supplier) grants the other party a limited licence to use such materials only during the term of the outsourcing transaction and for the execution of the relevant outsourcing tasks.

(ii) Developments. In the event that the outsourcing tasks result in the creation and development of any works, the parties need to agree on the ownership of such developments.

Finally, in the event that the scope of an outsourcing transaction includes the supply to the customer of third party software or other IP rights, licensing or assignment terms will need to be also agreed in compliance with the software distribution agreement reached with the relevant owner.

14.2 Are know-how, trade secrets and other business critical confidential information protected by local law?

Know-how, trade secrets and other business critical confidential information can be specifically protected in the outsourcing agreement by the parties and are subject to legal protection under Spanish intellectual property laws (including copyright law), as well as under other laws such as Spanish Unfair Competition Law.

14.3 Are there any implied rights for the supplier to continue to use licensed IP rights post-termination and can these be excluded from the agreement?

No implied risks exist in the event of pre-existing materials owned by the customer if the agreement sets out a specific duration of the licence. Regarding developments performed by the supplier while performing its tasks under the outsourcing agreement, in the event that no specific provision has been agreed by which IP rights of developments are fully assigned to the customer, there are risks that the supplier retains certain IP rights over such developments after termination of the outsourcing agreement.

14.4 To what extent can the customer gain access to the supplier's know-how post-termination and what use can it make of it?

See the answer to question 14.1 above regarding pre-existing materials and developments. Unless otherwise agreed, no rights exist for the customer to access the supplier’s know-how post-termination and to make use of it.

Liability

15.1 To what extent can a party limit or exclude liability under national law?

Under Spanish law, parties to an outsourcing transaction are free to limit or exclude liability. In fact, the exclusion of certain categories of damages (e.g., indirect damages or loss of profits) is quite common in these transactions in Spain.

Without prejudice to the foregoing, according to the Spanish Civil Code (article 1,102), such limits shall not apply, even if they were formally agreed by the parties in writing, in the event of wishful misconduct by the breaching party. Also, Spanish case law has equated certain cases of gross negligence with wishful misconduct and, under such circumstances, liability may not be limited or excluded either.

15.2 Are the parties free to agree a financial cap on liability?

Yes. Parties to an outsourcing transaction are free to agree a financial cap on liability. In Spanish outsourcing deals, it is standard market practice to agree on liability caps.

In any case, the limitation to exclude liability in the event of wishful misconduct and gross negligence, set out in question 15.1, above also applies to liability caps.

Dispute Resolution

Many outsourcing agreements set out escalation procedures to the parties’ management teams as a prior step to resolve disputes and in order to avoid formal legal disputes. Also, mediation by an expert is also quite a common mechanism in outsourcing agreements for certain matters as a preliminary measure to avoid courts or arbitration.

In Spain, it is common for disputes which arise from outsourcing transactions to be submitted to Spanish courts or both national and international arbitration.

Good Faith

17.1 Is there any overriding requirement for a customer and supplier to act in good faith and to act fairly according to some objective test of fairness or reasonableness under general law?

Spanish general civil law sets out the duty of the parties to an agreement to act in good faith as one of the main principles applicable to contract law and, thus, the duty to act fairly applies to both the customer and the supplier. Applicability of the good faith principle cannot be excluded by the parties.

Acknowledgment

The authors would like to acknowledge Guillermo Canalejo, partner at Uría Menéndez, for his invaluable assistance during the preparation of this chapter.